Phototree Ltd manufactures and sells high quality photographic card. The auditors have highlighted to the company that some packs of card on $25$ August $2021$ were sold at a price of $$55$ each. These items were included in closing inventory on $31$ July $2021$ at their manufacturer cost of $$58$ each. Further investigations revealed that during the inventory count on $31$ July $2021$ there were a number of packs of cards of A$4$ size card that had been damaged by a water leak. The following week, the company eliminated the damage by cutting the card down to A$5$ size $($A$5$ size is smaller than A$4$ size$).$ The card was then repackaged and then returned back into inventory. The cost of cutting and repackaging was $$5$ per pack. The normal selling price of the card is $$85$ per pack for the A$4$ and $$60$ per pack for the A$5.$ However on $17$ August $2021$ the company reduced the selling prices of all of its card by $10\%$ in response to price cuts made by its competitors.

Cherryprint Ltd$,$ one of Phototree Ltd$$s customers, bought some of the $$rectified$$ card and used it to print some professional photos for a customer. Cherryprint informed Phototree Ltd that these professional photos had been returned by the customer as they included marks that were not part of the photographs. Cherryprint believes that the marks were part of a production flaw made by Phototree Ltd and is consequently seeking compensation.

  

 

Required:

Discuss the impact that the above information may have on the draft financial statements of Phototree Ltd for the year ended $31$ July $2021.$